Summary

A firm of solicitors which had acted in breach of trust by releasing trust money to a fraudster could not expect to persuade the court that it was fair to excuse it from liability on the basis that it had, in all respects connected with the loss, acted reasonably. Its failings had represented departures from a sophisticated regime intended to minimise the risks of loss to lenders and lay clients.

Facts

The appellant bank (S) appealed against a decision ([2013] EWHC 1380 (QB), [2013] P.N.L.R. 24] relieving the respondent firm of solicitors (R) of liability after it had acted in breach of trust.

S had agreed to lend £150,000 to an individual (V) for the purpose of purchasing a property. R conducted the conveyancing, acting for both V and S. A second firm of solicitors (X) fraudulently presented itself as acting for the vendor. However, the vendor, who was not involved in the fraud, had never agreed to sell the property. As a result of the fraud, R released S's money to X on the day before completion was due in the belief that it was completing the sale. Completion did not take place, and S did not obtain a charge over the property. The money was not recovered. S brought a claim against R for breach of trust on the basis that it had released the advance without completion ever taking place. The High Court concluded that R had acted in breach of trust; however, it had done so in the genuine belief that completion was taking place. It found that R should be wholly relieved of liability under the Trustee Act 1925 s.61 because S's loss had in substance been caused by X's fraud, an unconnected third party, for which R could not fairly be treated as responsible.

S submitted that the judge (1) failed to recognise R's transfer of the funds to X's client account on the day before completion as being a separate and distinct breach of trust; (2) erred in construing s.61 by reference to the Companies Act 1985 s.727(1).

Held

(1) A purchaser's solicitors did not have a lender's implied authority to transfer trust money pending completion to the client account of any other solicitor than the firm which was in fact acting for the owner and intending vendor of the property on which the lender was to obtain a charge on completion. X was not acting for the owner, had no instructions either to contract for or complete the sale to V, and had not the slightest intention of using any part of the money transferred for the purpose of discharging the existing mortgage. For that reason, the transfer of the money on on the day prior to completion was a breach of trust (see paras 10, 14-16 of judgment). (2) The question whether a trustee had acted reasonably in respect of matters connected with the beneficiary's loss was not to be resolved by considering each specific complaint separately. The judge had taken too lenient a view of the seriousness of R's numerous departures from best practice in the period between requesting the funds from S until it was misappropriated from X's account weeks later. The part of the picture that was connected with S's loss began with R's making of inadequate requisitions, the receipt of inadequate replies, the failure to obtain X's written commitment to follow the completion code before transferring the completion moneys, and the failure to appreciate that completion had gone seriously wrong when no confirmation that the previous mortgage had been discharged was received. Those failings were wholly unreasonable and sufficiently connected with S's loss. In the wholly exceptional circumstances that the fraudster was a solicitor, rather than a mere imposter, it could be assumed that the fraud would probably have been successfully achieved even if R had acted reasonably in all those respects. However, that assumption did not lead to the result that its conduct was not connected with S's loss. The failings represented a significant departure from a sophisticated regime whereby risks of loss to lenders and clients were minimised, even if not wholly eradicated. Where solicitors failed, in serious respects, to play their part in that structure, and at the same time were swindled into transferring and releasing trust money to a fraudster without authority, they could not expect to persuade the court that it was fair to excuse them from liability on the basis that they had demonstrated that they had in all respects connected with that loss, acted reasonably. In any event, R formed part of a larger picture of the shoddy performance of a conveyancing transaction from start to finish, which left the instant court in no doubt that it would be unfair to excuse the firm from liability, in whole or in part. The judge had adopted an over-lenient view about the requirement to show reasonable conduct, attributable to an incorrect attempt to construe s.61 by reference to the similar, but by no means identical, provisions in the 1985 Act. His exercise of discretion could not stand. R had not shown that it acted reasonably in all respects connected with S's loss, therefore the discretion did not strictly arise at all. Even had R done so, and the matter fell to be considered afresh before the instant court, it would not have been regarded as fair to grant R any relief from liability for breach of trust (paras 96-102).

Appeal allowed